SEC Imposes New Disclosure Requirements on Chinese IPOs Amid Beijing Crackdown

The Securities and Exchange Commission said on Friday it would require additional information from Chinese companies seeking to be listed on U.S. stock exchanges, following Beijing’s intensified crackdown on issuing shares to abroad.

“In light of recent developments in China and the overall risks associated with the China-based company [variable interest entities] structure, I have instructed staff to request certain information from offshore issuers associated with China-based operating companies before their registration statements are declared effective, ”said SEC Chairman Gary Gensler, in a press release.

The so-called variable interest entities are a structure used by large Chinese companies from Alibaba to JD.com to go public in the United States while bypassing Beijing oversight because the country does not allow direct foreign ownership in in most cases. These variable interest entities allow operating companies based in China to establish offshore shell companies in another jurisdiction and issue shares to public shareholders.

Gensler said he was concerned that “average investors might not realize that they own shares in a shell company rather than a China-based operating company.”

The SEC will require Chinese companies to clearly distinguish the management services of the front company from the operating company, while indicating any risks associated with future actions of the Chinese government.

The move came as Beijing stepped up its surveillance on the flood of Chinese listings in the US ridesharing app, Didi has become the latest victim of the crackdown. The stock fell nearly 30% this month after Beijing announced a cybersecurity investigation, suspending new user registrations.

Tensions between the two countries could be a blow to Chinese companies, which have claimed their listing in New York in recent years. In 2020, 30 China-based IPOs in the United States raised the most capital since 2014, according to data from Renaissance Capital.

There were at least 248 Chinese companies listed on three major U.S. exchanges with a total market capitalization of $ 2.1 trillion, according to the U.S.-China Economic and Security Review Commission. There are eight Chinese state-owned enterprises nationally listed in the United States